organizations’ collection of thrift from member SHGs provides cash collateral that can be withheld in case of default and thus should increase repayment incentives.
In the sample of 299 village organizations, 36 percent applied a sanction for SHGs that miss an installment, 41 percent had a loan-recovery committee, 35 percent provided in-kind consumption credit, 25 percent provided marketing services, 47 percent collected thrift from their member SHGs, 82 percent employed trained bookkeepers, 37 percent of the SHGs in the sample were regularly audited, and 23 percent presented their books at village organization meetings.
Factors influencing loan repayment
The model used to estimate the effects of various factors on repayment shows that monitoring and loan recovery arrangements are highly significant, both statistically and economically. Regular audits, checking of SHG books at village organization meetings, and depositing of SHG savings with the village organization are estimated to increase the probability of full repayment by 8.3, 9.5, and 20 percentage points, respectively. Although the village organization’s involvement in marketing has no impact on repayment, in-kind consumption credit is predicted to increase the probability of full payment by 12.7 points, suggesting that non- economic benefits from credit groups increase repayment incentives. This finding also implies that village organizations are better positioned to help smooth consumption and address credit market imperfections than to intervene in output markets. The results also suggest that SHGs are more likely to fully repay
loans from banks—by 18.6 points according to the estimate—than loans from the IKP program. The program’s lower repayment rate points to limits in village organizations’ credibility, possibly because of their relatively recent establishment. High installment frequency has an almost equally large effect (15 points), consistent with the notion that frequent small installments enhance repayment performance for households with credit constraints. As have other studies, this study found that full repayment is less likely for loans with longer duration and, less significantly, higher interest. Other studies have found mixed evidence on the impact of
group characteristics, but the results of this study suggest that the probability of repayment increases with the size of the group up to about 14 members and decreases thereafter. In contrast, the probability of repayment decreases with the length of time the group has been in operation up to about five years. Although groups with a high percentage of poor individuals show lower rates of full repayment, the magnitude is small: a 10-point increase in
very poor members would reduce full repayment by only 1.7 points. Here the trade-off between sustainability and service to the poorest is much smaller than suggested by some other studies. Neither caste composition nor homogeneity has a significant impact on repayment.
Summary and policy implications
In contrast to most existing literature that studies the effects of group and individual attributes on loan repayment in microcredit groups, this study investigates the effects of exogenous monitoring and loan recovery arrangements, together with loan and group characteristics. Because banks and others can provide microfinance institutions with additional resources contingent on adoption of certain minimum rules, the findings from this study could be of great practical relevance. The results highlight the following four policy implications:
1. Repayment rates are significantly lower on loans originating in externally provided grant resources managed by village organizations. This finding highlights the need for further inquiry on why this is the case and how to improve the repayment performance of loans from grant resources.
2. Among SHGs, external management policies (such as regular monitoring and audits and in-kind consumption credit) and loan terms (group savings deposits with the lender, frequency of repayment) appear far more important to full repayment than group characteristics such as the poverty level of members. This result suggests that, in this context, even groups composed of very poor borrowers can achieve high repayment rates if village organizations adopt proper rules and management practices. Furthermore, SHG federations and other external group supervisors should consider implementing the management policies that can encourage full repayment.
3. Third, the results suggest that the optimal size of a group is about 14 members. This finding can provide some guidance in group formation. n
For further reading: C. Ahlin and R. M. Townsend, “Using Repayment Data to Test across Models of Joint Liability Lending,” Economic Journal 117, no. 2 (2007): F11–51; R. Cull, A. Demirguc-Kunt, and J. Morduch, “Financial Performance and Outreach: A Global Analysis of Leading Microbanks,” Economic Journal 117, no. 2 (2007): F107–33; M. Sharma and M. Zeller, “Repayment Performance in Group-Based Credit Programs in Bangladesh: An Empirical Analysis,” World Development 25, no. 10 (1997): 1731–42.
Yanyan Liu (
y.liu@
cgiar.org) is a research fellow in the Markets, Trade, and Institutions Division of the International Food Policy Research Institute (IFPRI). Klaus Deininger (
kdeininger@worldbank.org) is a lead economist at the World Bank.
This brief is based on Klaus Deininger and Yanyan Liu, “Determinants of Repayment Performance in India Microcredit Groups,” World Bank Policy Research Working Paper No. 4885 (Washington, DC: World Bank, 2009).
INTERNATIONAL FOOD POLICY
RESEARCH INSTITUTE Supported by the CGIAR
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sustainable solutions for ending hunger and poverty Supported by the CGIAR
www.worldbank.org Copyright © 2010 International Food Policy Research Institute and the World Bank. All rights reserved. Contact
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